How the world re-balances itself. The news this morning that Michael Geoghegan, chief executive of HSBC, is to move to Hong Kong, leaving the bank to be represented in London by Stephen Green, its chairman, reminded me of why HSBC put its chief executive in London in the first place.

HSBC, of course, once rejoiced in its full name – the Hong Kong and Shanghai Banking Corporation – which I regret that it dropped since it was one of the great names in finance. When it took over Midland Bank in 1992, it was told by the Bank of England that it had to move its headquarters to London.

HSBC, a bank run by Scottish expatriates who worked in  Hong Kong when it was part of the British empire, did not like that very much but it was forced to comply.

Now, 17 years later, and presumably with the approval of the Financial Services Authority, it is reasserting the arrangement it wanted in the first place – to run the bank from the expanding Asian markets and treats its UK subsidiary as just that.

To remind myself of all this, I looked back at the FT stories from the time, written by Robert Peston, my former colleague and now BBC business editor, and found something else interesting. This is from one story that he wrote in March 1992:

As for the Bank of England, it will examine any takeover proposals carefully, although it is expected to give its approval. The Bank’s primary aim is to protect the interests of Midland’s depositors. So it will seek guarantees that Midland’s deposits will not be used to make loans in the colony – just in case there is an economic calamity in Hong Kong after 1997 when it reverts to Chinese rule.

Ho, ho, ho is all one can say with hindsight. Not only was there no economic calamity but Hong Kong has been the model for China’s extraordinary growth since then.

However, the notion of ringfencing UK deposits to make sure they are not used for risky lending in far-off places is back in fashion as a way of handling future bank collapses. The difference is that the country from which UK depositors are supposed to be protected is the US, not China.

Paul Volcker is clearly too old and too independent minded to feel any need to avoid criticising the White House and the Treasury, although he has a role in Barack Obama’s administration as chairman of the Economic Recovery Advisory Board.

Mr Volcker has been agitating for some time about what he regards as an inadequate approach to dealing with large financial institutions that combine commercial and investment banking arms. He has called for some form of reinstatement of the Glass-Steagall Act.

In his evidence to Congress this morning, he zeroed in on the problem that a range of big institutions, now including investment banks such as Goldman Sachs and Morgan Stanley, as well as traditional commercial banks and hybrids such as JP Morgan Chase, are being designated as “systemically important”.

The clear implication of such designation, whether officially acknowledged or not, will be that such institutions, in whole or in part, will be sheltered by access to a federal safely net in time of crisis; they will be broadly understood to be ‘too big to fail’ . . .

In fair financial weather, the important institutions will feel competitively hobbled by stricter standards. In times of potential crisis, it would be the institution left out of the ‘too big to fail’ club that will fear disadvantage.

Compare that with the evidence of Tim Geithner, the Treasury Secretary, yesterday:

Identification of a firm as a Tier 1 financial holding company will not convey a government subsidy – it will be no guarantee of extraordinary governmental assistance in the event of financial distress. To the contrary, it will be a guarantee of substantially stricter supervision and regulation by the government – an intensity of government oversight that will serve as a strong disincentive for forms to become too big, complex, leveraged and interconnected.

On the whole, I agree with Mr Volcker and cannot help but think Mr Geithner is indulging in wishful thinking. As my column this morning noted, such institutions gain higher ratings and a lower cost of funding, as well as the comfort of a “heads I win, tails the taxpayer loses” implied government backstop.

In return for that, they merely have to suffer (or continue to outwit) their regulators. That will be irritating but it sounds like a good bargain to me.

The problem here, as Mr Volcker identifies, is that last year’s extraordinary events have made explicit what governments wanted to avoid disclosing – that large financial institutions will be propped up in times of trouble.

The only way to convince the market otherwise, and to reduce the obvious advantages of becoming a Tier 1 financial firm, is to let at least one of them collapse next time. That was what the Treasury tried to do with Lehman Brothers but could not hold the line.

Until then, being ‘too big to fail’ is going to be too attractive for most big institutions to resist. I would be surprised if any of them choose, as Mr Geithner suggests, to shrink themselves.

My column in the FT this week is on how to prepare for the next financial crisis:

Of all the suggestions since the financial crisis erupted to rein in banks and curb their incentives to become too big to be allowed to fail, the most cunning is the “living will”.

My view, however, is that enforcing wills could be both a sound discipline and help with the “too big to fail” problem by reducing the advantages of being big. If banks do not like it, they have to come up with another way to reassure British (and other) taxpayers that they will not be a burden again.

“Living will” is a misnomer, since the term means a plan drawn up by a bank for how it can be broken up if it is insolvent. It would be simpler and more accurate to use the term “will”, as Mervyn King, governor of the Bank of England, did when he coined the phrase in a speech in June.

“Making a will should be as much a part of good housekeeping for banks as it is for the rest of us,” said Mr King. Since then, that notion has been endorsed by Lord Turner, chairman of the Financial Services Authority, and Alistair Darling, the UK chancellor of the exchequer.

Put like that, it is uncontroversial. No one wants a repeat of last year’s scramble by governments to prop up all the operations of international banks such as Lehman Brothers and Fortis. The mess of assets and liabilities in different countries, not to mention a tangled web of derivative contracts, caused chaos.

Yet it is provoking resistance among some British banks. “If they [the regulators] want to turn the clock back and return to a world of national markets and small, simple banks unable to support global growth, they are going the right way about it,” says one banker.

They object to Lord Turner’s belief in wills as a means of forcing banks to simplify international activities and curb tax avoidance. Some fear they will be forced to set up ring-fenced subsidiaries in each country to make things simpler for regulators and governments.

You can read the rest here and comment below.